How To Write Off An Uncollectible Accounts Receivable

Writing Off An Uncollectible Accounts Receivable means that when the company sold goods to customers on Credit Basis, then some customers may not pay on time or it is possible that some unpaid invoices become Uncollectible or becomes Bad Debts Written Off. When an account becomes uncollectible, then it must be written off by debiting Actual Bad Debt Expense And Crediting Accounts Receivable / Sunday Debtor.

For Example, If ABC Company sold 5 chairs to Mr. A for Rs. 50000, 3 Fans to Mr. B for Rs. 60000. Then, if on due date, Mr. B fails to pay on time and he also unable to pay for the amount of one Fan (Rs. 20000). This amount becomes Bad Debts for the company. The Accounting Journal Entry is shown below as:-

                         Bad Debts Written Off a/c      20000

                                                                Mr. B      20000

(Amount of One Fan Rs. 20000 Become Bad Debts For Company’ Business)

In order to save business from projected higher Loss (Bad Debts), the company needs to estimate amount of Receivables that it may not be recovered from customers. In fact, there are two methods of accounting for uncollectible accounts that are the Allowance Method / Approach And Direct Write-Off Method / Approach. Some company either use Allowance Approach or Direct Write Off Method, depending upon either Cash Basis of Accounting or Accrual Basis of Accounting.

You can Also Read Out, “Difference Between Allowance Method And Direct Write Off Method”

If the estimation is more than Actual Bad Debts Written Off, then there is a Credit Balance but if the estimation is less than Actual Bad Debts Written Off, then there is a Debit Balance which is needed to be adjusted by adding more Allowance For Doubtful Accounts equal to the value of difference between Actual Bad Debts and Allowance For Doubtful Accounts / Provision For Doubtful Debts at the end of Current Accounting Period.

How To Estimate Allowance For Doubtful Accounts?

1. Allowance Method

This method is further divided into two types for the calculation of Bad Debts Expense by using Formula:

(i) Monthly Estimated of Uncollectible Accounts Expense (Income Statement Approach)

In this approach, a provision / allowance is created that some percentage of Net Sales may not be recovered from our customers based on the Past Experiences. The entry for estimation on Net Sales is shown below:-

       Uncollectible Accounts Expense a/c   XXX

                                                               Allowance For Doubtful Accounts a/c   XXX

(Allowance / Provision On Net Sales is Created)

To calculate bad debt expense, the percentage of sales formula or method is applied as shown below:

Bad Debts Expense Formula = Net Sales X Percentage of Sales

The Uncollectible Accounts Expense is transferred to Income Statement / Profit And Loss Account while Closing Balance of Allowance for Doubtful Accounts which is a What is A Contra Asset Account is deducted from the Ending Balance of Accounts Receivable on Balance Sheet in Order To find the Net Realizable Value (NRV) Of Accounts Receivable.

(ii) Aging of Accounts Receivable (Balance Sheet Approach)

In this approach, Accounts Receivable is valued by comparing the over due time period during which customers pay its due or not. By comparing different time period, the company better understand which customer pay on time, average time or at delayed time.

Here Bad Debts Expense Formula is calculate as shown below:

Bad Debts Expense = Closing or Average Accounts Receivable X Percentage of Receivables or Overdue Payments

2. Direct Write Off Method

Under this method, the business only records Uncollectible Accounts for which the business is sure that these become Uncollectible and it is not possible to recover from customers.

So, writing of An Accounts Receivable is necessary because there are possibilities that some customers may not pay unpaid invoices in time or unable to pay forever. Also to show true and reliable information of Actual Sales And Accounts Receivable to Users of Financial Statements.